March 27, 2014 / 9:52 AM / in 4 years

UPDATE 1-Norway's central bank sees rate hike, growth recovery in 2015

* Keeps rates on hold at 1.5 pct

* Still sees next hike in summer of 2015

* Sees 2014 mainland GDP growth at 1.75 pct, 2015 at 2.5 pct (Adds detail)

OSLO, March 27 (Reuters) - Norway’s central bank kept interest rates on hold on Thursday, as expected, and said it remained on course for a rate increase in the summer of 2015, when the economy should be recovering from a recent rough patch.

The bank left its key rate at 1.5 percent and said growth on the mainland - excluding the vast offshore oil and gas sector - would slip to 1.75 percent this year from last year’s 2.0 percent, before picking up to 2.5 percent in 2015.

“The analyses imply an unchanged key policy rate in the period to summer 2015, followed by a gradual increase,” Governor Oeystein Olsen said. “The path for the key policy rate remains approximately unchanged from December.”

Norway’s crown currency rose after the bank kept its rate path in place, wrongfooting some investors who had expected it to flag a loosening of monetary conditions.

Norway was western Europe’s best-performing economy until recently. It suffered unexpected turbulence late last year as consumption weakened, housing prices fell and growth in oil investment slowed. That created a policy dilemma for the bank.

A rate cut would have given the economy a much-needed boost. But household debt is already among the highest in Europe and the currency is at a four-year low, threatening higher inflation. The bank’s room to manoeuvre was limited.

And growth is expected to outpace the euro zone’s for years to come, the budget is increasing thanks to lucrative oil revenues and unemployment is barely visible at around 3 percent. All support the case for a rate hike.

The bank noted that imbalances in the financial sector remain high but given the recent house price falls, they are not building up any further.

“Low house price inflation may eventually slow the growth of household debt,” the bank said. “But the ratio of total credit to GDP is at a historically high level, and household debt has risen faster than disposable income.”

The bank expects its key policy rate to average 1.5 percent this year and 1.75 percent in 2015. It sees the jobless rate rising to 3.75 percent this year and 4 percent in 2015. (Reporting by Balazs Koranyi; Editing by Larry King and Toby Chopra)

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